Kate MacNamara: Government supermarket sector rethink likely has radical options on the backburner

Consumer Affairs Minister David Clark has signalled he's keen to improve wholesale supply. Photo / Mark Mitchell

OPINION:

Last week's Budget quietly contained $10.7m over four years to pay for a "dedicated team" of bureaucrats to advise the Government on how to respond to Commerce Commission market study reports.

The only such study it has in hand covers the retail grocery sector, where competition is weak, prices are perennially high and now climbing steeply, and consumers are squeaking noisily about the effect on their wallets.

Another Commission report on competition is due at the end of the year and will cover building supplies, the prices of which are also spiking, if you can get the goods at all.

The new team will be housed in the Ministry of Business, Innovation and Employment (MBIE), and it's easier to say what it won't do than what it will.

The money won't fund a regulator, though it appears a new one is coming for supermarkets. The Commerce Commission recommended in March - and the country's duopoly players Foodstuffs and Woolworths have already agreed - that supermarkets and their suppliers should be bound by an industry regulator to enforce fair dealings between the parties.

The regulator is also likely to have some purview over the provision of wholesale groceries by the two behemoths. Details of this announcement are expected from David Clark, Minister of Commerce and Consumer Affairs, in the next few days.

"While there is no funding set aside in Budget 2022 to establish a grocery sector regulator, the Government is looking at the role a grocery sector regulator could play. Any decisions on this will be outlined when the formal response to the Commission's report is released in the coming days," a spokesperson for the MBIE said.

A mandatory code of conduct with enforcement mechanisms for often small suppliers and their two huge customers will be the easy part; there are ready models to choose from in Britain and Australia.

More novel would be regulatory purview of grocery wholesaling. Gary Mortimer, professor at Australia's Queensland University of Technology and a specialist in the grocery retail sector called it "quite an irregular idea", and he knows of no precedents in the grocery sector in countries similar to New Zealand.

But requiring major supermarkets to "fairly consider" competitors' requests for wholesale goods, on transparent terms, is recommended by the Commission, and Minister Clark has signalled he's keen to improve wholesale supply.

These mooted changes are significant, especially if they are taken together with more price transparency and the promise by supermarkets made last year in the face of the ComCom investigation - and followed-up by the Government last week with legislation - to abandon land and lease covenants aimed at blocking competitors from setting up shop near existing stores.

But they do not constitute radical reform in a sector where competition is clearly insipid, and prices, as the Commission put it, "appear comparatively high by international standards".

The really nettlesome problem, for the Government as for shoppers, is that there's no easy fix.

What the new policy shop within MBIE is likely to allow the Government to do is to keep the possibility of more extreme reform in the grocery sector on the cards through a period of high inflation, though unplayed, unless events require.

The Commerce Commission's draft report last year contained a number of quite extreme departures from market norms by way of proposed action: they included the forced divestiture of assets, including stores or parts of the business like wholesale, and even the possibility for the government to enter the sector directly.

Clark and Finance Minister Grant Robertson indicated these ideas aren't dead when they each confirmed recently that the Government is considering going further than the Commission's final recommendations.

Pressure to put a clamp on supermarket profits is building as the cost of groceries soars. Photo / file

But they also know that recourse to heavy-handed measures would be messy, and in terms of reducing prices, probably futile.

Any break-up would come with the reasonable likelihood of lawsuits by the supermarkets. And while there were plenty of self-interested enthusiasts for a "break-em up" course of action who submitted views to the Commerce Commission last year - there were also plenty of supermarket-hired defendants of the status quo - no independent voices championed radical change.

Australia-based Tim Morris, who heads the consultancy Coriolis came the closest. But he also suggested that New Zealand grocery prices are 20-30 per cent higher than those in the US, and that only a measly 1.3 per cent of that difference is down to a "duopoly premium".

Breaking up the duopoly is not exactly low-hanging fruit. For comparison, Morris reckoned bio-security rules and other of New Zealand's often idiosyncratic regulations make up at least 7 per cent of the price premium.

Indeed, the Commission itself backed away from more extreme market remedies in its final report, fearing that they contained the considerable possibility of pushing prices higher rather than lower.

The Government has allocated $10.7m for a dedicated team to advise on supermarket reform

While the new MBIE team chews all of this over - with the likely help of more consultants - the Government will be free to make convenient villains of the supermarkets at a time when their own spending is helping to fan inflation.

So eager was Clark to point an accusing finger last month, when Stats NZ announced that food price inflation ran at 7.6 per cent in the year to March, that he penned a press release to point out that the rising cost of food was running well ahead of general inflation.

"Latest annual food price figures released today confirm the need to rein in the super profits of the supermarket duopoly," he gleefully proclaimed, and proceeded, disingenuously, to compare the new food price numbers to the older year to December, 2021 general inflation data.

But the Government ought to know that such scapegoating is a dangerous game. Note that while Prime Minister Jacinda Ardern recently insisted New Zealanders "aren't getting a fair deal" from supermarkets, she stopped short of proclaiming that we're being "fleeced".

That's because the Government has already tackled, in Ardern's words, those arch fleecers - the fuel companies. New price displays were mandated, wholesale contracts were tinkered with and prices rose higher than ever.

Faced with a sobering slide in the polls the Prime Minister was forced to tacitly own the fuel price fleecing and cut the tax take.